OK! You have decided to be a real estate investor.
You know people who have become financially fit buying houses and you want the same success they enjoy.
You are being coached, reading books, taking classes, finding properties, running the numbers, and making offers.
You know how to do it.
Do you know why you should do it? What is the attraction of real estate? What is your why? When I got into real estate I had been living off the liquidation of my recreational vehicle business for a couple of years and the cash reserves were getting low.
I needed a quick start and partnering up with someone who had experience and with people who had or could get money would be helpful.
I went to real estate school, passed the California broker test, met my future partner and opened an office.
I learned quickly and soon my success was attracting the attention of some neighbors and friends.
This prompted me to develop a little napkin presentation to explain why they should be involved with me.
I called it "The Four Basics" and they became the foundation of my why.
Here is the napkin: #1.
I would draw a see-saw or teeter-totter to explain the principal of leverage.
Remember your play ground experiences when the little kid could hold up the big kid because they had more of the board on their side of the bar? Replace the little kid with a little bag of money and the big kid with a big bag of money and you have real estate leverage.
You can buy a property and receive all the benefits of ownership using leverage.
My little $10,000 bag of money can buy a big $100,000 bag of property.
#2.
I would draw a house with an arrow pointing up on the left side.
This represents appreciation.
If the big bag goes up in value 4% my little bag just increased in value by 40%.
(100,000 x.
04 = 4,000/10,000 =.
40).
I was never very good at math but I understand these numbers well.
This kind of understanding is good for your financial health.
#3.
I would draw an arrow on the right side of the house pointing down.
This represents depreciation which can provide some significant tax benefits.
Think of it! How many things can you buy that are increasing in value and Uncle Sam lets you treat them as if they are wearing out? Not very many, right? Say the improvement on our $100,000 property is $80,000.
Currently we can depreciate that over 27.
5 years and write off $2,909 a year against taxable income.
#4.
I would draw a rectangle with a line from the top left corner to the bottom right corner.
This creates two triangles.
The upper triangle represents equity buildup and the lower triangle represents debt reduction.
When I put a tenant in this property and they pay rent, they are buying the house for me.
Part of their monthly rent is paying down the principal on my loan and part is paying the interest.
They don't get to deduct the interest.
I do and I get another tax benefit.
The payment on a 90% loan for our $100,000 house at 6% interest for 30 years would be $539.
60 per month.
$750 to $850 a month rent will probably cover the payment, my property taxes, insurance, maintenance, and maybe provide a little cash flow.
I have an asset working 24/7.
I can sleep and earn at the same time.
Summary of 1st year benefits: $4,000 in appreciation, $872 in tax savings (assuming a 30% tax bracket), $1,611 in interest deduction (assuming a 30% tax bracket), $1,200 in cash flow, (assuming $100 a month), $1,105 in equity buildup for a total benefit of $8,788.
That's 87.
88% return on your investment.
Take out the cash flow (assuming break even) and it is still a 76% return.
That's one of my Whys! Now! You can draw this presentation on your own napkins and hang them on the refrigerator, on the bathroom mirror, in your office, or stuff one in your pocket.
Draw it and study it until it becomes part of your nature and one of your personal Whys.
So you don't have $10,000.
Share the napkin with a friend, an associate at work, at church, or even a family member.
They put up the money and you do the work.
You have the knowledge and the time.
They have the money and no time.
Split the profits in an agreeable ratio.
50/50 would give the investor partner one-half of the numbers above.
Do you think they would be happy with a 44% or a 38% return? I don't even know how to do the math on your return but it would be big.
My napkin presentation grew into a small meeting and then into a large meeting of people who wanted to be my partners.
You can do the business by yourself but if money is tight and your credit is a little shaky you don't have to run alone.
Together is power.
Fortunes are made in real estate regardless of where the market is and which way it it heading.
You need some other whys because being a landlord isn't a passive activity.
It takes some time and energy.
It requires knowledge, patience, business sense, and sensibility.
These can be acquired.
Some of your whys should be things that motivate you and keep you on track.
I woke up at 4:00 am this morning and kept thinking about writing this article.
At 4:30 I was at the computer and it's now 9:00 am.
It has been exciting.
I hope that real estate excites you and moves you to action.
I'll finish with one of my daily affirmations, "I will persist until I win.
If I persist long enough I will win.
I will persist.
I will win.
" Illegitimus non carborundum est! Go out and win!